Holding

Land situated in an urban setting, even if temporarily cultivated, does not become agricultural land; therefore, the sale proceeds are taxable as capital gains.

Summary

The Supreme Court examined whether a parcel of land situated on Mount Road, Madras, which had been used for raising bananas and vegetables, qualified as "agricultural land" under the Income Tax Act, 1961 and thus could be exempt from capital gains tax. The assessee argued that the land was agricultural and therefore not a capital asset, while the Revenue contended that its urban location, municipal classification, surrounding commercial development, and the high sale price indicated a non‑agricultural character. The Court held that the determination of agricultural status is a factual inquiry requiring a cumulative assessment of all relevant circumstances, such as environment, intention at purchase, nature of the land, past and future use, potential value, and municipal records. Applying these criteria, the Court concluded that the land was not agricultural and the surplus from its sale was taxable as capital gains. Consequently, the appeal by the Commissioner of Income Tax was allowed, setting aside the High Court judgment.

Issues considered

Whether the land sold during the assessment year qualified as 'agricultural land in India' and thus was excluded from the definition of 'capital asset' under Section 2(14)(iii) of the Income Tax Act, 1961.
Whether the surplus realized on the sale of the land was exempt from capital gains tax under Section 45 of the Income Tax Act, 1961.

Legislation cited

Income Tax Act, 1961s. 2(14)(iii), s. 256(1), s. 45, s. 47(viii)

Subjects

agricultural landcapital assetcapital gains taxIncome Tax ActSection 45Section 2(14)(iii)Section 256(1)urban landland usetax exemption

Judgment

A COMMISSIONER OF INCOME TAX, MADRAS
v.
GEMINI PICTURES CIRCUIT PVT. LTD.

MARCH 27, 1996

B
(B.P. JEEVAN REDDY ANDS. SAGHIR AHMAD, JJ.]

Income Tax Act, I961 :

Sections 2 (14)(iii), 45 and 47(viii)-!ncome Tax liability as capital
C gain from ''Agiicultural Land in India "which is purchased and subsequently
sold, will be alloweJ,--Mere fact that a p01tion of the said land· in heart of
city being used for raising bananas and vegetables as stop gap activity will not
make the land "Agiiculture Land'c._J'Agiicultural Land in India" whether a
capital asset-Factors Relevant for the purpose-Nature and character of
D land, environment and situation--lntention of the assesses at the time of
purc!zase--Previous, present and future use of land-Pote_ntial value, Revenue
Records of land-Cun1ulative consideration of all the relevant facts tobe taken
into account.

A property comprising of 70 acres, 16 grounds 825 sq. ft situated in
E the heart of Madras city, was purchased by one R in 1944. He sold the land
to an extent of 79 ground 242 sq. ft, roughly four acres out of it to the
respondent-assessee under a registered sale-deed dated 27.10.1950 for a
consideration of Rs. 5,53,705. The land comprised of a hotel building as
well. After 1mrchasing the said property, the assessee constructed two
F buildings over an extent of 20 grounds towards north. A common road of
a width of 25ft was also formed at the western extremity of the property;
the road took away 7.6. grounds. An extent of 9.8. grounds was kept as
frontage for the building. Excluding the area covered by three buildings,
their frontage and the road, an extent of 39.1 grounds was still left vacant
and the assessee was raising bananas and growing vegetables thereon.
G
In the years 1966-67, the asscssee executed three sale deeds. 19.74
grounds was sold to India Cements Limited. 10.05 grounds was sold to
Imperial Tobacco Company of India Limited and 3.85 grounds was sold
· to Handicrafts Emporium. All these sale deeds were in respect of the
H vacant land comprised in 39.1 grounds.
1008
CJ.T. MADRAS v. GEMINI PICTURES CIRCUfT PVT. 1009

In the proceedings relating to assessment year 1967-68, the assessee A
contented that the land sold under the aforesaid saledeeds, being an
agricultural land, does not constitute "capital asset 11 and therefore the
profits arising from its sale is not exigible to tax under Sec. 45 of the
Income Tax Act, 1961. The Income Tax oflicer rejected the contention. On
appeal, the appellate Assistant Commissioner aflirmed the view taken by B
the Income Tax Oflicer. On further appeal to the Tribunal, there was a
difference of opinion between the Accountant Member and the Judicial
Member. The Accountant Member attached great importance to the fact
that the land in question was under cultivation on the date of sale and
other circumstances do not detract from the sale position. In view of the
j difference of opinion, the matter was referred to the Vice-President of C
Tribnnal. The Vice President agreed with Judicial member. The Vice
President observed that the actual user is not conclusive and held that an
urban land does not become an agricultural land because some cultivation
is done thereon. He referred to relevant circumstances, viz., (a) the en-
vironment and situation (b) the intention of the asses see at the time of D
purchase (c) the nature and character of the land (d) the previous and
present and future use to which land is put (e) its potential value. (I) the
fact that it was registered as municipal land in municipal record and not
recorded as agricultural land; and hence held that it can not be treated as
an agricultural land.
E
On reference U/s 256(1) of the Act, the two questions which were
referred to the High Court at the instance of the respondent assessee; were
as under;

"(i) Whether, on facts and in the circumstances of the case the land
F
.' sold during the year of account was not Agricultural land in India during
the year of assessment and hence not liable to be excluded from the
definition of the words 'Capital Asset''!

(ii) Whether, the surplus realised on the sale of land is not exempt
from Capital Gains'!"
G
The said questions were answered by the High Court in favour of the
assessee and again.st the Revenue; and held that actual user of the land in
the main would be basis for the test for determination.

The Revenue has preferred the present appeal against High Court's H
1010 SUPREME COURT REPORTS [1996] 3 S.C.R.

A order.
Allowing the appeal, this Court

HELD : l.l. Whether a land is an agricultural land or not is essen-
tially a question of fact. The question has to be answered in each case
B having regard to the facts and circumstances of that case. The court has to
answer the question on a consideration of all of them-a process of evalua-
tion. The inference has to be drawn on cumulative consideration of all the
relevant facts. [1014-H, 11115-A]

1.2. Mere fact that it was sold at a high price indicates its potentiality
C for non-agricultural use. [1014-F]

2. The land is situated on Mount Road, Madras which is most impor-
tant and the busiest thorough fare in the City. The land is surrounded on
all sides by industrial and Commercial buildings. No agricultural opera-
D lions were being carried on in any land nearby. In the face of the above
circumstances the mere fact that vegetables \Vere being raised thereon at
the time of the sale or for some years prior there to does not change the
nature and character of the land. Obviously, it was only a stop gap activity.
It was not a true reflection of nature and character of land. [1013-E•G] ..
E Gordhanabhai Kahandas Dalwadi v. CIT, (1981) 127 IT 664 (Guj.)
andMotibhai D. Patel (Dr.) v. CIT, (1981) 127 !TR 671 (Guj), Distinguished.

Sarifabibi Mohamed Ibrahim v. CIT, [1993] Supp. 4 SCC 707 =
(1993) 204 !TR 631, relied on.

F C!Tv. V.A. Tiivedi, 0998) 172 !TR 95 = (1998) Tax LR 373 (Rom.),
referred to. i ..

Gemini Picntres Circuit (P) Ltd. v. CIT, (1981) 130 !TR 686 (Mad),
reversed.

Q CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 6133-34
of 1983.

From the Judgment and Order dated 1.8.80 of the Madras High
Court in I.T.R. No. 563 of 1976.

H K.N. Shukla, S.N. Terdol and S. Rajappa for the Appellants.
C.I.T. MADRAS v. GEM IN I PICTURES CIRCUIT PVT. [JEE VAN REDDY. J.] 1011

Aruneshwar Gupta and Manoj K. Das for the Respondents. A

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. These appeals arise from the judgment of
the Madras High Court answering the t\VO questions referred to it at the
instance of the respon<lent-assesscc in favour of the asscssee and against B
the Revenue. The t\Vo questions arc :

"(i) Whether, on the facts and in the circumstances of the case the
lands sold during the year of account was not 'Agricultural land
in India' during the year of assessment and hence not liable to be C
excluded from the definition of the words 'capital Asset'?

(ii) Whether, the surplus realised on the sale of land in the year
of account is not exen1pt from capital gainsT'

The property known as Spencer's Hotel comprising 70 acres, 16 D
grounds* 825 sq. ft. situated on Mount Road, Madras was purchased by
one Guiab Bhai Mukund Rao Rane in J.944. Rane sold an extent of 79
grounds 242 sq.ft. (roughly 4 acres and odd) out of it lo the assessee under
> • a registered sale-deed dated October 27, 1950 for a consideration of Rs.
5, 53,705. The extent purchased by the assessee comprised the hotel
building as well. After purchasing the said extent, the assessee constructed E
two buildings over an extent of 20 grounds towards the north. A common
road of a width of 25 ft. leading from Mount Road was also formed at the
western extremity of the property; the road took away 7.6 grounds. An
extent of 9.8. grounds was kept as frontange for the two buildings. Exclud-
ing the area covered by three buildings, their frontage and the road, an F
extent of 39.l grounds was still left vacant. On this extent, the assessee was
rising bananas. From 1962, it had been growing vegetables thereon.

In the years .1966-67, the assessee executed three sale-deeds. 19.74
grounds was sold to India Cements Limited on April 29, 1960. 10.05
grounds was sold to Imperial Tobacco Company of India Limited on April G
29, 1966 and 3.85 grounds was sold to Handicrafts Emporium on March
27, 1967. All these sale deeds were in respect of the vacant land comprised
in 39.1 grounds aforesaid. In the proceedings relating to its assessment for

In the city of Madras, we are told, a ground means an area/plot adn1easuring 266 sq.
yards. H
1012 SUPREME COURT REPORTS (1996J 3 S.C.R.

A the Assessment Year 1967-68, the assesscc contented that the land sold
under the aforesaid three sale-dec<ls, being an agricultural land, does not
constitute 'capital asset' and, therefore, the profit arising from its sale is
not exigible to tax under Section 45 of the Income-Tax Act, 1961. The
Income To,x Officer rejected the contention holding that having regard to
the location and the physical characteristics of the land, the development
B and use of the adjoining lands and the price at which and the purpose for
which it was sold, go to show that it was not an agricullural land. On
appeal, the Appellate Assistant Commissioner affirmed the view taken by
the Income Tax Officer. On further appeal to the Tribunal, there was a
difference of opinion between the Accountant Member and the Judicial
c Member. The Accountant Member attached great importance to the fact
that the land in question was actually under cultivation on the date of the
sale and held that the other circumstances pointed out by the Income Tax
Officer and the Appellate Assistant Commissioner do not detract from the
position that the land was actually being used as an agricultural land on
D the date of its sale. The Judicial Member on the other hand held that
having regard to the location, its price, the fact that it was registered as an
urban land in the Municipal records and the purpose for which land was
purchased would all go to show that it was not an agricultural land. In view
of the said difference of opinion, the matter was referred to the Vice
President of The Tribunal. The Vice President agreed with the Judicial
E Member. The Vice President observed that the actual user is not con-
elusive. He held that an urban land docs not become an agricultural land
merely because some cultivation is done thereon. He referred to several
relevant circumstances, viz., (a) the environment and situation; (b) the
intention of the assessee at the time of purchase; ( c) the nature and
F character of the land; (d) the previous, present and future use to which the
land is put; (e) its potential value and(!) the fact that it was registered as
municipal land in the municipal records and not recorded as agricultural 1
land and held that it cannot be treated as an agricultural land. Thereupon
the aforesaid two questions were referred for the opinion of the High Court
at the instance of the assessee. The High Court lcloked to the actual user
G of the land in the main and on that basis held the land to be an agricultural
land. In this appeal, the view taken by the High Court is questioned.

The land is situated within the limits of the Madras Municipal Y
Corporation. It is located on the Mount Road which is the main artery of
H the city and its business Centre. Even when the assessee purchased it in
C.l.T. MADRAS>. GEMINI PICTURES CIRCUIT PVT [JEEVAN REDDY. J.J 1013

1950, there was a hotel building located in the said land. In the municipal A
records, the property was registered as urban land and urban land tax was
being levied thereon. It bore the Municipal door number "151-Mount
Road, Madras." After purchasing the land, the assessee put up two more
buildings thereon in the northern portion which together occupied an
extent of 20 grounds which means that they were suhst<intially l<Jrge build- B
ings. One of them was occupied by the assessee for its own business
purposes and the other was occupied by its sister concern. After laying a
road and reserving certain portion to serve as frontage for the. buildings,
1:u1 area of about 39 grounds \Vas remaining open. The assessee was raising
,... bananas thereon until 1962 and thereafter vegetables until the year 1966-67 C
!
when it was sold to three parties as aforestated. It is significant to notice
that even when the assessee purchased an extent of about 4 acres of land
with a hotel building in 1950, for a consideration of 5.53 lakhs, it could not
have been for the purpose of raising banana plantation or vegetables. And
when it was 'sold in 1966-67 (which is the relevant point of time for our D
purposes) it was sold at the rate of about Rs.260 per sq. yard. Neither the
sale-deed under which the assessee purchased the said land nor the sale
deeds executed by it in 1966-67 describe the land as an agricultural land.
'..... . It could not be so described for the simple reason that it was registered in
the Municipal records as an urban land and Urban Land Tax was levied
thereon. After purchasing the land, the assessee itself constructed two large E
buildings thereon. Indeed, the buildings were being used for non-residen-
tial purposes. The land is situated on Mount Road, Madras which is the
most important and the busiest thorough fare in the city. The land is
surrounded on all sides by industrial and commercial buildings. No agricul-
tural operations \Vere being ca~ried on any land nearhy. In the f<::1ce of the F
above circumstances, the mere fact that vegetables were being raised
thereon at the time of the sale or for some years prior thereto does not
change the nature and character of the land. Obviously, it was only a
stop-gap activity. It was not a true reflection of the nature and character
of the land. It is a matter of common knowledge tbat in the heart of New G
Delhi, there are houses with large compounds wherein a portion of the
open land is used for raising vegetables. That does not make those
portions agricultural lands. In the case of the assessee too, the raising of
vegetables was a stop·-gap activity until the assessee found a better use for
it, whether construction of buildings or sale. It is well to remember that the H
(\

1014 SUPREME COURT REPORTS [1996] 3 S.C.R.

A question whether a particular land is an agricultural land has to be decided
on a totality of the relevant facts and circumstances. There may be cir-
cumstances for and against. They have lo be weighed together and a
reasonable decision arrived at. ()ne has to take a realistic viC\V and see how
were the persons selling and purchasing it understood it. Is it believable
B that in 1966-67, the assessce <ind the aforesaid purchasers were under the
impression thal they were selling and purchasing agricultural land? Did
they consider and treat the land as agricultural land? The answer is too
evident to call for an elucidation.

Certain decisions have been cited before us by counsel for both the
c parties in support of their respective stands. It musl, however, be remem-
bered that facts of no two cases will be identical. The tests evolved by the
courts are in the nature of guidelines. No hard and fast rules can be laid
down in the matter for the reason that it is essentially a question of fact.
Even so, a brief reference to the cases cited would be in order. Strong
D reliance was placed by Sri Aruneshwar Gupta upon two decisions of the
Gujarat High Court in Gordhunbhai Kalwnadas Dalwadi v. Commissioner
nf Tncome-Ta;; Gujarat, [1981] 127 I.T.R. 664 and Dr. Motibhai D. Patel v.
Commissioner of Income-Tax, Gujarat, [1981] 127 l.T.R. 671. Jn the first
case, the land was registered as agricultural land in the revenue records
. .
and land revenue was being paid thereon. No permission was taken for
E converting it to non-agricultural use before the date of sale. Potential
non-agricultural use or the fact that development had taken place in the
vicinity of the land, it was held, do not militate against the fact that it was
an agricultural land. In the next case too, the land was registered as an
agricultural land and permission to convert it into non-agricultural land was
F not obtained before the date of sale. In the circumstances, it was held that
mere fact that it was sold at a high price only indicates its potentiality for
non-agricultural use. On a consideration of entirety of the circun1stances,
it was held that it was an agricultural land.

A recent decision of this Court in Sa1ifabibi Moluned /brahini and
G Othm· v. Commissioner of Jnco111e-T1L<, [1993] 204 l.T.R. 631, rendered by
a Bench comprising one of us (B.P . .leevan Reddy, J.) is relied upon by the
learned counsel for Revenue. The Bench observed: "whether a land is an
agricultural land or not is essentially a question of fact. Several tests have
been evolved in the decisions of this Court and the High Courts, but all of
H them are more in the nature of guidelines. The question has to be answered
C.LT. MADRAS'· GEMINI PICTURES CIRCUIT PVT. [.lEEVAN REDDY, J.J 1015

in each case having regard to the facts and circumstances of that case. A
There may be factors both for and against a particular point of view. The
court has to answer the question on a consideration of all of thetn - a
process of evaluation. The inference has to be drawn on a cu111ulative
consideration or all the relevant facts. 1' Several judgments of this Court and
the High Courts were referred to including a judgment of the Bombay High
Court in Commissioner of Income Tax v. V.A. Tlivedi, (1988] 172 I.T.R. 95.
B
On a consideration of the factors for and against, the Bombay High Court
observed in VA. T1ivedi that for ascertaining the true character and nature
of the land, it must be seen whether it has been put to use for agricultural
purposes for a reasonable span of time prior to the date of sale and further
whether on the date of sale the land was intended to be put to use for c
agricultural purposes for a reasonable span of time in future. Examining
the case from the said point of view, the High Court held that the fact that
the agreement of sale was entered into by the asscssee with a housing
society is of crucial relevance since it showed that the assessee had agreed
to sell the land for admittedly non-agricultural purposes. The ratio of the D
said decision was approved in Sanfabibi.

We do not think it necessary to multiply the cases, since, 1n our
respectful opinion, no olher conclusion is reasonably possible in the facts
of the case before us than the one arrived at by us. All the three authorities
under the Act too arrived at the same conclusion. With great respect to E
the learned Judges of the High Court, we find their conclusion wholly
unsustainable and unacceptable.

The appeal is accordingly allowed, the judgment of the High Court
JS set aside and the two questions referred under Section 256(1) are
answcre<l in favour uf the Revenue an<l against the assessec. The appellant F
r shall be entitled to their costs - Rupees ten thousand consolidated.

N.K.S. Appeal Allowed.